07 April 2014

Paul N Goldschmidt: The ECB and austerity

As the forthcoming European elections approach, it is urgent to clarify the debate surrounding the ECB so as to avoid that simplistic and superficial slogans propagated by overzealous politicians misinform the elector, writes Paul Goldschmidt.

Indeed, many voices are suggesting that excessive (budgetary) austerity is counterproductive and capable of stalling the nascent economic recovery. These criticisms refer to declarations by personalities such as Christine Lagarde (IMF) or number of recognised economists – whose views are often misinterpreted or taken out of context – when they are not simply the ructions of politicians vaunting inapplicable measures such as "eurexit", salary increases, protectionism, postponing budgetary rigour, etc.

There seems to be a broad consensus on the diagnosis which, in the absence of an agreement to reduce national deficits, aims, nevertheless, at reducing excessive indebtedness. This stance is structurally contradictory unless an EMU wide agreement to devalue the debt through inflation was achievable, which is clearly utopian. So the protagonists fall back on the easy way out by conferring on "Europe" the responsibility for stimulating economic growth while, simultaneously, denying it the necessary resources. Indeed, it is only at European level that a policy aiming at stimulating consumption in "healthy" Member States (Germany) can be envisaged so as to attenuate the impact of austerity measures on countries that have not yet even started to implement seriously the required structural reforms (France).

The preferred scapegoat of supporters of a European stimulated growth policy is the ECB whose independence is strongly contested in this particular regard. It is invited to finance the recovery through measures that would, if necessary, totally disregard its by-laws and/or the EU Treaties. Such a choice comes easily as it appears to exonerate national governments despite the fact that, together with their predecessors, they alone are responsible for drafting and ratifying the Treaties and Regulations that "Brussels" and "Frankfurt" are charged with implementing.

Any objective analysis would conclude that the ECB has already interpreted the rules that govern its operations with a significant degree of flexibility (enough to anger the Bundesbank) and, in so doing, can also claim to have, so far, done "everything it takes to save the euro". If the EMU’s monetary policy, implemented by the ECB, constitutes an important aspect of economic policy, it is, nevertheless, obvious that it cannot, in and of itself, be the sole spur to the recovery.

Thus, the ECB finds itself alone in imagining new tools to carry out monetary policy within the eurozone... But this "Europe" that is supposed to finance the recovery is prohibited by the Treaties to indulge in monetary financing; additionally, by a unanimous decision of the Member States, it is endowed with an insignificant budget and derisory "own resources" limiting any significant recourse to issuance of Eurobonds, project bonds, etc. which, otherwise, might be eligible for purchases by the ECB.

It is clearly highly desirable that, one day, the ECB will be endowed with similar powers to those at the disposal of their American, British of Japanese counterparts in the financing of the economy as well as intervening efficiently in foreign exchange markets. This implies further integration towards a "federal" Eurozone and therefore a thorough revision of the Treaty, which is currently not on the cards.

Full article

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Paul N Goldschmidt, Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt